What Drives Profitability of Banks: Do Interest rate, and Fee and Commissions impact the profitability of Banks? Evidence from the European Countries

AbdelKader EL Alaoui, Ginanjar Diwandaru, Saiful Azhar Rosly and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: Traditionally, the main role of the bank is to offer loans to its customers, to facilitate the intermediary role in the financial market between the investors and feed the need of the big corporations in terms of investment. This study is an attempt to analyze, at the same time, the impact of three factors that are involved in the income of the European banks. The first two are endogenous to the bank and the third one is deemed, a priori, to be exogenous to the bank. Our objective is to look at the influence of “Fee & commissions”, the “Net Non-interest income” and the interest rate on banks’ profitability in a panel data of 34 banks chosen from different European countries. The interest rate of reference is supposed to be under the control of the central bank but subject to movement due to the interactions between the cross-border countries and the competitive framework within the same country. The “Fee & commissions” and the “Net Non-interest income” are more related to the efficiency of the management team and the effectiveness of the processing inside the same bank. Our main finding is that the “Fee & commissions” are not really influencing the profitability of the European banks. However, the “Net Non-interest income” and the interest rate are significantly impacting the profitability of the European banks.

Keywords: Banking System; Regulation; Fee and commissions; Bank Profitability; panel data (search for similar items in EconPapers)
JEL-codes: C22 C58 G21 G28 (search for similar items in EconPapers)
Date: 2014-10-28
New Economics Papers: this item is included in nep-ban and nep-eff
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